Saturday, February 17, 2007

Crippled Capital and Crocodile Tears

Bob Geldof once said that extreme poverty in a world so affluent is an intellectual absurdity. He is completely correct. But why does extreme poverty exist?

I read recently that the 3 wealthiest people in the world are wealthier than the 48 poorest nations with combined populations of 600m.

Shocking, eh?

Another shocking example is Uncle Scrooge McDuck (Disney Duck Tales) a millionaire with *obscene* wealth -- his vault is a huge swimming pool of gold coins if I remember rightly.

Now, ask yourself what those 3 wealthiest people do with /their/ fortunes?

Most probably they invest 99% of their wealth in companies far and wide. Even if they save part of their fortune, a large proportion of their savings (as with all savings) will be recycled and invested into ventures by their savings bank.

So on the face of it these three /are/ obscenely rich, but they don't jealously hoard their wealth like Scrooge McDuck, it's put it to work and it in turn helps employ, educate and put meals on the table for tens of thousands (maybe a magnitude or so higher!) of people.

Obviously not much of this investment capital ever reaches those 48 poorest countries on earth. Why?

Contrary to common consensus, economics is an optimistic science. One of economics' main tenets is that the ratio of investment capital to labour should tend to even out across the globe over time. This is due to simple supply and demand.

Let's assume two broad production input categories. The first is investment capital, i.e. cash. The second is labour. Both are needed in varying quantities to produce output. The output is sold and the owners of capital and labour receive compensation for their efforts.

The returns to capital should be lower in areas with an abundance of capital, due to investors having to compete harder for investment opportunities. The same is true for labour, increasing labour supply drives wages lower, as there is less capital spread among more workers.

This gives investors an incentive to go to countries with an abundance of labour and workers to go where there are high levels of capital investment. This is precisely what we see in practice, for example, corporations look to invest in China which has a very low capital per person ratio, and Chinese citizens look to emigrate to Western countries with a high ratio.

The problem is that these flows of capital and people are being suppressed, resulting in boils and lesions of inequality and poverty.

Developed countries are mainly democracies, and the electorate want to stay affluent. To that end, they don't want too many immigrants competing with them for jobs, and they definitely don't want foreigners flooding their social welfare systems. On the other side they want to avoid capital going abroad, therefore they ensure that capital stays in their country by erecting barriers to trade -- i.e. a company can't expect to produce elsewhere and sell back in the home country without punitive tariffs.

Developing countries are beset with corrupt bureaucracies and dictators. In many cases this corruption is a form of legalised thievery due to corrupt legal systems. The risk is that high proportions of investment in corrupt countries are arbitrarily stolen from the investor. Moreover, capitalists within the developing country (who often have considerable influence and ties to government) may prefer not to have an influx of foreign capital in their country and look to create barriers to investment. These countries often subtly restrict emigration, or in extreme cases not so subtly, e.g. North Korea and Maoist China.

Most economists argue that freedom of trade will bring about a more affluent, more equal world. Freeing capital flows is only one part of the story however. I believe that the importance of the other half, that of freedom of movement has been woefully underestimated.

The kernel of the problem is that the "enlightened" plebs in developed democracies and the capitalist oligarchs of the developing world have forged an air tight cartel of wealth and power, which will lock out most of today's poor from peaceful, respectable lives for the foreseeable future.

Poverty /is/ intellectually absurd, but /our/ selfishness locks us and the poor into this status quo. The challenge is to find the courage and vision which can knock us out of this horrific equilibrium.

15 comments:

you are absolutely right. excellent vocabulary and beautiful economic essay. however, i do feel that globalization in one sense does contribute to this stark inequality in a sense of excuses of freeing up the global economy by forming trade blocs which contributes more to their selfish deeds to gain personal benefit from it.

An execellent brief discussion John. I am particulary interested in your point of cheap labour. Indeed, it is cheaper to build factories in 'underdeveloped' countries (some postcolonial critics will be scornful with this term). This is dilemma actually as poor countries need foreign investment in order to deal with job shortages, but big companies do not work based on the ethical code.

btw, would you mind if i add your blog to my link and i would greatly appreciate it if you do it likewise

hey Citu, i'll read you site regularily and if i like it i'll link to it for sure!!

as to "post-colonial critics", dollars are green not black or white. i think people that are desperate to put food on the their family's tables wouldn't see themselves as a fancy "post colonial critic".

"big companies do not work based on the ethical code"

well, i suspect big companies are forced to be more ethical than any other type, cos their actions will attract more publicity. in any case, western style ethics are luxuries when you need to pay for your kid's school fees...

Thanks heaps for checking out my blog. Sorry if you find my english language dexterity is not really satisfying.

I'd like to know more if big companies are forced to work based on an universal ethical codes. They are very likely to follow what the rules say but in Indonesia or underdeveloped countries, breach is easily committed. Freeport and Newmont are typical examples where their waste affected local communities.

Publicity is good for control but it could only happen in the countries where society is fully aware of the power of information.

Furthermore, in a society where political clientelism is strong (a legacy of authoritarianism) negotiation often occur between local leaders and the companies. Tom Beneal for instance, was a respectable leader for Papuans but now he is working for Freeport.

I dont worry too much with postcolonial critics as i dont fully subscribe their ideas. However, their criticism of categorisations (developed, underdeveloped, modern and tranditional and so on) are worth to take into consideration.

"Sorry if you find my english language dexterity is not really satisfying."

I didn't say that!! :) And anyways my dream is to speak and write Indonesian, so I could do that like you can English, I would be very happy indeed!!

I just want to keep the links to sites I visit regularly, that's all :)

"Freeport and Newmont are typical examples where their waste affected local communities."

Very true! But I wonder why we don't hear much about the mining and logging operations run by TNI, local Indo and other Asian companies. It is a very complicated issue, I'll have to figure out what my thoughts are...

John: "Rather than watching Africans starve on TV, Africans should be allowed to starve on our doorsteps. They would be still Africans, not Irish, they are still penniless (but legally they wouldn't be allowed to work here) and don't get a cent from us -- but at least they have the freedom to starve in a rich country (Ireland is 2nd richest in Europe now by some measures)."

And here’s my comment: I know that what you want to stress is the freedom to choose where one wants to starve. However, I don't know what you would gain from having such a policy then. Wouldn't it be simply moving a problem from one country to a bigger problem in another country?

I say bigger problem because in most developing countries at least poor people have support systems (peer and extended family) that will enable them to survive. There are also many odd jobs one can do to feed themselves without being bogged down by legality. This is not possible in developed countries. What will happen then?

What I’m saying is having an open door policy has plenty of repercussions. And I think the latter understandably make many countries have to think more than twice and would rather keep their doors open to privileged ones because it keeps things simple on their end.

"I say bigger problem because in most developing countries at least poor people have support systems (peer and extended family) that will enable them to survive."

Well, I would allow the poor to decide whether their problems are bigger or not - they are poor not stupid.

Freer movement would also make rich countries take extreme poverty more seriously.

"What I’m saying is having an open door policy has plenty of repercussions."

I agree with you, but most necessary corrections in policy have seemingly harsh repercussions in the short term.

Take rice import tariffs in RI for example. Free trade in rice would have massive repercussions, but every economist they will all tell you that rice imports will go a long way to help the 20% of RI's population that are extremely poor and desperate.

John: “I would allow the poor to decide whether their problems are bigger or not - they are poor not stupid.”

Unfortunately most poor people won’t have access to good education and, often times, good information. They may not be stupid, but knowledge and information can make huge difference in this case (i.e. A doesn’t know anything about the US. A may thinks that it’s a country where dreams come true, and decide to spend all savings to get to the country. B knows about US immigration and work policy, and can find access to this kind of information. If A and B have the same amount of savings, I think B will think more than twice before deciding to jump ship).

Since you’re an economist, suppose you want to propose this open door policy to your government, what would be the incentives for them?

This could be a long post, i am afraid. But mainly, the categorisation (developed, underdeveloped, third worlds etc) is divided based on continents. Many rich countries with a stable democracies are found in Europe, America, Australia. While Africa, Asia fall into diferent category. But this does not suit the actual fact when we see Singapore's miraculous economic growth.

For postcolonial critics, this is similar to what happened when imperialism reached its peak. At that time categorisation was made: traditional vs modern, irational vs rational and so on. Based on this binary models, identity the fittest is formed by creating the identity of the unfit. So the creation of Third World can not be seen in isolation from the existence of Europe.